Public/Private Decisions Price Levels and Supply/Demand

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Scenario One

In the early part of the last decade, there was an overproduction of coffee. The price dropped so low that producers' costs were higher than the market price. The reason this happened was that market prices became high before this, and the supply of coffee increased substantially. In the meantime, demand for coffee and everything else remained the same. Price Level 1.

Coffee prices came down again, at first overshooting the former equilibrium price, throwing the coffee market into confusion. In the meantime, gourmet coffee houses began appearing, which began charging a premium for coffee in the period of falling prices. Price Level 2.

Gourmet coffee houses tend to open in high-rent areas and cater to higher income consumers. Because of the change they created for taste and preferences and the higher income market, the gourmet coffee houses had a win-win in a period of falling wholesale prices and increasing retail prices. Price Level 3.

But in the middle of the decade, the party was over, and wholesale prices started increasing because of some shortages caused by weather and the rising overall market prices again. Where is the new equilibrium price? Price Level 4.

Explain the changes in the supply and demand curves based on the above information. Draw a graph showing how the changes affect the price levels, supply and demand.

Scenario Two

You have been asked to discuss the differences between the microeconomic definitions of supply and demand and the macroeconomic differences of aggregate supply and demand. Discuss what determines supply and demand and aggregate supply and aggregate demand. Explain what causes movements along the curve and shifts in the curve for supply and demand and aggregate supply and aggregate demand (make sure that you include price as a variable). Include whether this is an example of the microeconomic definition of supply and demand or the macroeconomic definition of aggregate supply and demand. Most importantly, did this cause a shift in the curves or a movement along the curves? What happened to equilibrium price, supply, demand, aggregate supply or aggregate demand? Describe your graphs.

- After Hurricane Katrina, what happened to the price of fish?
- After the development of the microchip, what happened to the price of computers?
- After the government raised tariffs on imported cheese, what happened to the price of domestic cheese?
- Polyester suits have become trendy again. What happens to their price?
- Internet auction sites are becoming more popular, and people are using them more and more.
- A new health report came out that said red wine lowers cholesterol.
- The government raises taxes.
- Inflation increases.
- Immigration laws are relaxed.
- The government increases spending.

Scenario Three

The PPF curve shows the economic choices a country can make about production given scarce resources, a given technology, and a given quantity of inputs. Assume you are a developing country, producing food and clothing at maximum capacity. What could happen when foreign investors start investing in your country?

Discuss what type of foreign investments would be best for the economy's PPF. What are the opportunity costs of these decisions?

Include what will happen to private and public choices as the economy grows. Support your discussion of these issues and consequences using at least 2 graphs.

Solution Preview

Scenario One

In scenario one, when there was an overproduction of coffee, the demand remains the same but there is an increase is supply. When there is such a situation there is a right shift in market supply. This leads to an increase in the quantity demanded and a decrease in price. Next, when the gourmet coffee houses began appearing and charging a premium for coffee, there is a change in demand in the period and the demand increases. The demand curve shifts to the right and at the same price more quantity is demanded.

In the graph one both these effects are illustrated:
When the supply of coffee increases, the supply curve shifts from position S0 to S1. This leads to a decline in price to Price 1. After this, when the demand increases and the demand curve moves from position D0 to D1, there is an increase in price to Price 2. When the gourmet coffee houses began selling coffee to high rent areas and high income consumers, the effect is that because of high income of coffee drinkers, the demand for coffee increases. The demand curve shifts to the right and at the same price more coffee is demanded. This increases the quantity of coffee at equilibrium and also the price of coffee at equilibrium. When the wholesale prices begin increasing because of shortages caused by poor weather and higher market prices, the supply of coffee falls and the supply curve moves to the left. This means that the same quantity is available at higher prices and that the supply of coffee has decreased.

On the second graft, when the coffee houses tend to open in high rent areas, the demand increases or the demand curve D1 moves to D2. The new price is Price 3. This price is the new ...

Solution Summary

The response provides you a structured explanation of shifts in demand and supply curves . It also gives you the relevant references.

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BSc , University of Calcutta

MBA, Eastern Institute for Integrated Learning in Management

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